New Economics Papers
on Efficiency and Productivity
Issue of 2009‒12‒11
twenty-one papers chosen by

  1. Technical and Environmental efficiencies and Best Management Practices in Agriculture By Tamini, Lota D.; Larue, Bruno
  2. Productivity, Welfare and Reallocation: Theory and Firm-Level Evidence By Basu, Susanto; Pascali, Luigi; Schiantarelli, Fabio; Serven, Luis
  3. Catching-up, then falling behind: Comparative productivity growth between Spain and the United Kingdom, 1950-2004 By George Chouliarakis; Mónica Correa-López
  4. Do Firms Learn by Exporting or Learn to Export? Evidence from Small and Medium-Sized Enterprises (SMEs) in Swedish Manufacturing By Eliasson, Kent; Hansson, Pär; Lindvert, Markus
  5. The importance of R&D subsidies and technological infrastructure for regional innovation performance - A conditional efficiency approach By Tom Broekel; Charlotte Schlump
  6. Technical efficiency based on cost gradient measure By Miki Tsutsui; Kaoru Tone; Yuichiro Yoshida
  7. Efficiency measurement in the Spanish cadastral units through DEA By José Manuel Cordero Ferrera; Francisco Pedraja Chaparro; Javier Salinas Jiménez
  8. Cross-Country Differences in Productivity: The Role of Allocation and Selection By Bartelsman, Eric; Haltiwanger, John C.; Scarpetta, Stefano
  9. Inefficiency in the German Mechanical Engineering Sector By Alexander Schiersch
  10. Soil Conservation and Small-Scale Food Production in Highland Ethiopia A Stochastic Metafrontier Approach By Medhin, Haileselassie A.; Köhlin, Gunnar
  11. Does Public Investment Enhance Labor Productivity Growth in Argentina? A Cointegration Analysis By Ramirez, Miguel D.
  12. The Role of Soil Conservation on Mean Crop Yield and Variance of Yield - Evidence from the Ethiopian Highlands By Kassie, Menale; Pender, John; Yesuf, Mahmud; Köhlin, Gunnar; Mulugeta, Elias
  13. The Role of Production Risk in Sustainable Land-Management Technology Adoption in the Ethiopian Highlands By Kassie, Menale; Yesuf, Mahmud; Köhlin, Gunnar
  14. The Impact of Reducing the Administrative Costs on the Efficiency in the Public Sector By Matei, Ani; Savulescu, Carmen
  15. Offshoring and firm performance: Self-selection, effects on performance, or both? By Joachim Wagner
  16. Human Capital Spillovers, Productivity and Regional Convergence in Spain By Ramos, Raul; Surinach, Jordi; Artís, Manuel
  17. Applying a Nonparametric Efficiency Analysis to Measure Conversion Efficiency in Great Britain By Martin Binder; Tom Broekel
  18. Estimating Returns to Soil and Water Conservation Investments - An Application to Crop Yield in Kenya By Nyangena, Wilfred; Köhlin, Gunnar
  19. Substitution between Managers and Subordinates: Evidence from British Football By Bridgewater, Sue; Kahn, Lawrence M.; Goodall, Amanda H.
  20. The Effects of Assortative Mating on Earnings: Human Capital Spillover or Specialization? By Åström, Johanna
  21. Wages, Productivity and Industry Composition – agglomeration economies in Swedish regions By Klaesson, Johan; Larsson, Hanna

  1. By: Tamini, Lota D.; Larue, Bruno
    Abstract: An input distance function (IDF) is estimated to empirically evaluate and analyze the technical and environmental efficiencies of 210 farms located in the Chaudière watershed (Quebec), where water quality problems are particularly acute because of the production of undesirable outputs that are jointly produced with agricultural products. The true IDF is approximated by a flexible translog functional form estimated using a full information maximum likelihood method. Technical and environmental efficiencies are disaggregated across farms and account for spatial variations. Our results show that there is a significant correlation between technical and environmental efficiencies. The IDF is used to compute the cumulative Malmquist productivity index and the Fisher index. The two indices are used to measure changes in technology, profitability, efficiency, and productivity in response to the adoption of 2 selected best management practices (BMPs) whose objective is to reduce water pollution. We found significant differences across BMPs regarding the direction and the magnitude of their effect on profitability, efficiency and productivity.
    Keywords: Environmental efficiency; distance function; phosphorus runoff; productivity; profitability; technical efficiency.
    JEL: Q52 C43 Q25
    Date: 2009–07
  2. By: Basu, Susanto (Boston College); Pascali, Luigi (Boston College); Schiantarelli, Fabio (Boston College); Serven, Luis (World Bank)
    Abstract: We prove that the change in welfare of a representative consumer is summarized by the current and expected future values of the standard Solow productivity residual. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. Based on this finding, we compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that welfare change can be decomposed into three components that reflect respectively technical change, aggregate distortions and allocative efficiency. Then, using the appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries.
    Keywords: productivity, welfare, reallocation, technology, TFP
    JEL: D24 D90 E20 O47
    Date: 2009–12
  3. By: George Chouliarakis; Mónica Correa-López
    Abstract: The pattern of Spanish comparative labor productivity performance in the period 1950-2004 is underpinned by distinctive sectoral trends. From 1950 until the mid-1970s, Spain narrowed the aggregate labor productivity gap with Britain by shifting resources out of agriculture and by improving its comparative labor productivity position across most sectors, out of which manufacturing plays a central role. Significant improvements in comparative efficiency and the dynamic pace of comparative capital intensity characterize the catch-up phase. In the period 1975-1990 convergence stagnates. In spite of the continual shift of resources out of agriculture and the good comparative performance of small sectors, such as utilities, transport and communication, and agri- culture itself, comparative labor productivity was adversely affected by the catching-up exhaustion of manufacturing and construction and by the deterioration of comparative labor productivity in services. A dramatic slowdown in efficiency gains characterizes the plateau phase. Lastly, Spain has widened the aggregate labor productivity gap since the early 1990s. The deterioration of Spain's relative productivity position with Britain has affected all sectors except agriculture. Efficiency stagnation characterizes the divergence phase.
    Date: 2009
  4. By: Eliasson, Kent (Growth Analysis); Hansson, Pär (Growth Analysis); Lindvert, Markus (Growth Analysis)
    Abstract: Using a matching approach, we compare the productivity trajectories of future exporters and matched and unmatched non-exporters. Future exporters have higher productivity than do unmatched non-exporters before entry into the export market, which indicates self-selection into exports. More interestingly, we also find a productivity increase among future exporters relative to matched non-exporters 1-2 years before export entry. However, the productivity gap between future exporters and matched non-exporters does not continue to grow after export entry. Our results suggest that learning-to-export occurs but that learning-by-exporting does not. In contrast to previous studies on Swedish manufacturing, we focus particularly on small and medium-sized enterprises (SMEs).
    Keywords: productivity; learning-to-export; learning-by-exporting; matching
    JEL: D24 F14
    Date: 2009–11–27
  5. By: Tom Broekel; Charlotte Schlump
    Abstract: The importance of R&D subsidies for innovation activities is highlighted by numerous firm-level studies. These approaches miss however the systematic regional character of innovation activities and potential firm-spanning effects of this policy measure. The literature on regional innovation performance has widely neglected R&D subsidies so far. This paper analyzes the importance of R&D subsidies as well as the relevance of a publicly funded technological infrastructure for the innovation efficiency of German regions. Using conditional nonparametric frontier techniques we find positive effects of R&D subsidies and somewhat smaller ones for the technological infrastructure, which however vary between industries.
    Keywords: innovation policy, regional innovation efficiency, technological infrastructure, stepwise conditional efficiency analysis
    JEL: O18 O38 R58 R12
    Date: 2009–11
  6. By: Miki Tsutsui (Central Research Institute of Electric Power Industry); Kaoru Tone (National Graduate Institute for Policy Studies); Yuichiro Yoshida (National Graduate Institute for Policy Studies)
    Abstract: This study introduces a new scheme of data envelopment analysis (DEA) named cost gradient measure (CGM) to evaluate technical efficiency. In this model, we can obtain more cost conscious technical efficiency than those by other traditional DEA models such as CCR[7] and slacks-based measure (SBM) [19]. In addition, the CGM can avoid shortcomings of these traditional models, i.e. factor inefficiency scores can be measured for each input as opposed to CCR and SBM models. In this study, we show the generality of CGM that it includes CCR as a special case; and compare the CGM result with those of the other DEA models using illustrative data, and clarify favorite features of this model. In addition, we also apply these models to Japanese electric utilities and explain the characteristics of their results.
    Keywords: cost gradient measure, DEA, technical efficiency, input price
    Date: 2009–10
  7. By: José Manuel Cordero Ferrera (Universidad de Extremadura); Francisco Pedraja Chaparro (Universidad de Extremadura); Javier Salinas Jiménez (Universidad Complutense de Madrid)
    Abstract: This paper proposes an approach to measure efficiency of a set of units operating in an administrative public service, namely real estate cadastral offices, which have not been analysed previously. This study has been made possible thanks to the database provided by the Directorate General of Real Estate Cadastral Assessment which includes information on the 52 local offices in Spain for the period between 2000 and 2005. Data Envelopment Analysis has been used to estimate the efficiency levels of these offices. Subsequently, a second stage model based on bootstrap techniques is applied in order to identify other potential factors (differences in management techniques, demographic and economic variables, etc.) that may affect the estimated efficiency measures.
    Keywords: Efficiency, data envelopment analysis, cadastral
    JEL: H3 H5 C6
    Date: 2009
  8. By: Bartelsman, Eric (VU University Amsterdam); Haltiwanger, John C. (University of Maryland); Scarpetta, Stefano (OECD)
    Abstract: This paper combines different strands of the productivity literature to investigate the effect of idiosyncratic (firm-level) policy distortions on aggregate outcomes. On the one hand, a growing body of empirical research has been relating cross-country differences in key economic outcomes, such as productivity or output per capita, to differences in policies and institutions that shape the business environment. On the other hand, a branch of empirical research has attempted to shed light on the determinants of productivity at the firm-level and the evolution of the distribution of productivity across firms within each industry. In this paper, we exploit a rich source of data with harmonized statistics on firm level variation within industries for a number of countries. Our key empirical finding is that there is substantial variation in the within-industry covariance between size and productivity across countries, and this variation is affected by the presence of idiosyncratic distortions. We develop a model in which heterogeneous firms face adjustment frictions (overhead labor and quasi-fixed capital) and idiosyncratic distortions. We show that the model can be readily calibrated to match the observed cross-country patterns of the within-industry covariance between productivity and size and thus help to explain the observed differences in aggregate performance.
    Keywords: allocation of resources, productivity, firm heterogeneity, distortions
    JEL: L11 L16 L2 L25 O4 O57
    Date: 2009–11
  9. By: Alexander Schiersch
    Abstract: This paper aims to examine the relative efficiency of German engineering firms using a sample of roughly 23,000 observations between 1995 and 2004. As these firms had been successful in the examination period in terms of output- and export-growth, it is expected that a majority of firms is operating quite efficiently and that the density of efficiency scores is skewed to the left. Moreover, as the German engineering industry is dominated by medium sized firms, the question arises whether these firms are the most efficient ones. Finally an increasing efficiency gap between size classes over time is important since that would be a signal for a structural problem within the industry. The analysis - using recently developed DEA methods like bootstrapping or outlier detection - contradicts the two first expectations. The firms proved to operate quite inefficiently with an overall mean of 0.69, and efficiency differs significantly with firm size whereas medium sized firms being on average the least efficient ones. When looking at changes in efficiency over time, we find a decreasing efficiency gap between size classes.
    Keywords: DEA, German engineering firms
    JEL: C14 L60
    Date: 2009
  10. By: Medhin, Haileselassie A. (Environmental Economics Policy Forum for Ethiopia and Ethiopian Development Research Institute); Köhlin, Gunnar (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This study adopts the stochastic metafrontier approach to investigate the role of soil conservation in small-scale highland agriculture in Ethiopia. Plot-level stochastic frontiers and metafrontier technology-gap ratios were estimated for three soil-conservation technology groups and a group of plots without soil conservation. Plots with soil conservation were found to be more technically efficient than plots without. The metafrontier estimates showed that soil conservation enhances the technological position of naturally disadvantaged plots.<p>
    Keywords: Soil conservation; technical efficiency; metafrontier; technology adoption; Ethiopia
    JEL: L25 Q12 Q16
    Date: 2009–11–30
  11. By: Ramirez, Miguel D. (Trinity College, Hartford)
    Abstract: This paper addresses the important question of whether public investment spending on economic infrastructure enhances economic growth and labor productivity in Argentina. Following the lead of the endogenous growth literature, it presents a simple modified production function that explicitly includes the positive or negative externality effects generated by public investment. Using cointegration analysis, the paper estimates a dynamic labor productivity function for the 1960-2005 period that incorporates the impact of public and private investment spending and the labor force (rather than the rate of population growth). The results suggest that (lagged) increases in public investment spending on economic infrastructure--as opposed to overall public investment spending--have a positive and significant effect on the rate of labor productivity growth. In addition, the model is estimated for a shorter period (1970-2005) to capture the impact of foreign direct investment. The estimates suggest that foreign direct investment spending has a lagged positive and significant impact on labor productivity growth, while increases in the labor force have a negative effect. Thus, the findings call into question the politically expedient policy in many Latin American countries, including Argentina during the 1990s, of disproportionately reducing public capital expenditures to meet reductions in the fiscal deficit as a proportion of GDP.
    JEL: C22 O10 O40 O50
    Date: 2009–01
  12. By: Kassie, Menale (Environmental Economics Policy Forum for Ethiopia, Ethiopian Development Research Institute); Pender, John (International Food Policy Research Institute, Washington, DC); Yesuf, Mahmud (Environmental Economics Policy Forum for Ethiopia, Ethiopian Development Research Institute); Köhlin, Gunnar (Department of Economics, School of Business, Economics and Law, Göteborg University); Mulugeta, Elias (International Livestock Research Institute)
    Abstract: Land degradation has been one of the major areas of concern in Ethiopia. Governments and development agencies have invested substantial resources to promote land management technologies and reduce land degradation. However, there is little understanding of the impacts that land management technologies have on yield and yield variability. This paper investigates the impact of stone bunds on mean yield and variance of yield, using multiple plot observations per household in low- and highrainfall areas of the Ethiopian highlands. Our analysis incorporated the propensity score matching method, stochastic dominance analysis, and exogenous and endogenous switching regression methods. We found statistically significant and positive impact of stone bunds on yield in low-rainfall areas. This did not hold in high-rainfall areas. We did not find a statistically significant stone-bund impact on production risk in either high- or low-rainfall areas. The results were robust to both parametric and nonparametric analysis. The overall conclusion from the analysis is that the performance of stone bunds varies by agro-ecology type. This implies the need for designing and implementing appropriate technologies that enhance productivity and are better adapted to local conditions.<p>
    Keywords: Switching regression; stochastic dominance; propensity score matching; stone bunds; yield; yield risk; Ethiopia
    JEL: C35 O33 Q15 Q24
    Date: 2009–11–30
  13. By: Kassie, Menale (Environmental Economics Policy Forum for Ethiopia, Ethiopian Development Research Institute); Yesuf, Mahmud (Environmental Economics Policy Forum for Ethiopia, Ethiopian Development Research Institute); Köhlin, Gunnar (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper provides empirical evidence of production risk impact on sustainable land- management technology adoption, using two years of cross-sectional plot-level data collected in the Ethiopian highlands. We used a moment-based approach, which allowed a flexible representation of the production risk (Antle 1983, 1987). Mundlak’s approach was used to capture the unobserved heterogeneity along with other regressors in the estimation of fertilizer and conservation adoption. The empirical results revealed that impact of production risk varied by technology type. Production risks (variance and crop failure as measured by second and third central moments, respectively) had significant impact on fertilizer adoption and extent of adoption. However, this impact was not observed in adoption of conservation technology. On the other hand, expected return (as measured by the first central moment) had a positive significant impact on both fertilizer (adoption and intensity) and conservation adoption. Economic instruments that hedge against risk exposure, including downside risk and increase productivity, are important to promote adoption of improved technology and reduce poverty in Ethiopia.<p>
    Keywords: Production risk; sustainable land management technology adoption; moment based estimation; Ethiopia
    JEL: C33 D13 D81 O33 Q24
    Date: 2009–11–30
  14. By: Matei, Ani; Savulescu, Carmen
    Abstract: The goal of the paper is to evaluate the impact of reducing the administrative costs on the efficiency in the public sector. Within the general framework provided by the specialised literature, the proposed methodology uses the classical model of a function of production, thus describing the factors of influence of the administrative costs on production and productivity in the public sector. The theoretical results are empirical exemplified for a local service of public utility. Adapting the theoretical model to the empirical situation is grounded on statistic methods of analysis and regression. The interpretation of results inscribes in the economic framework specific for public economics. The results aim both the novel model of analysis and the concrete evaluation of the economic impact of reducing the administrative expenditure in the public sector. At the same time, the general topic of reducing the administrative costs is extended towards the public sector. The most relevant conclusion refers to the capacity of the classical economic models in developing the public sector
    Keywords: administrative costs;efficiency; productivity; public sector
    JEL: D73 H72 H59
    Date: 2009–02–15
  15. By: Joachim Wagner (Institute of Economics, Leuphana University of Lüneburg, Germany)
    Abstract: This paper uses unique new data for German manufacturing enterprises from matched regular surveys and a special purpose survey to investigate the causal effect of relocation of activities to a foreign country on various dimensions of firm performance. Enterprises that relocated activities abroad in the period 2001-03 for the first time are compared to firms that did not relocate activities abroad before 2006. The comparison is performed for both 2004 (to document differences between the two groups of firms after some of them started to relocate abroad) and for 2000 (when none of them did relocate abroad). It turns out that, compared to non-offshoring firms, firms that relocated activities were larger and more productive, and had a higher share of exports in total sales. All these differences existed in 2000, the year before some firms started to relocate, and this points to self-selection of “better” firms into offshoring. This finding is in line with results from recent theoretical models and with results from other countries. To investigate the causal effects of relocation across borders on firm performance, six different variants of a matching approach of firms that did and did not start to relocate abroad in 2001-03 were performed based on a propensity score estimated using firm characteristics in 2000 and the change in the performance variable between 1997 and 2000. The performance of both groups was compared for 2004-06 when some firms were relocating firms and the others were not. Broadly in line with hypotheses derived from the literature there is no evidence that offshoring has a negative causal impact on employment in offshoring firms. The effect is positive and large for productivity, and weak evidence for a positive effect on the wage per employee, the proxy variable for human capital intensity used, is found. Contrary to what is often argued, therefore, we find no evidence for a negative causal effect of offshoring on employment in Germany or on other core dimensions of firm performance.
    Keywords: Offshoring, Germany, enterprise panel data
    JEL: F23
    Date: 2009–11
  16. By: Ramos, Raul (University of Barcelona); Surinach, Jordi (University of Barcelona); Artís, Manuel (University of Barcelona)
    Abstract: This paper analyses the differential impact of human capital, in terms of different levels of schooling, on regional productivity and convergence. The potential existence of geographical spillovers of human capital is also considered by applying spatial panel data techniques. The empirical analysis of Spanish provinces between 1980 and 2007 confirms the positive impact of human capital on regional productivity and convergence, but reveals no evidence of any positive geographical spillovers of human capital. In fact, in some specifications the spatial lag presented by tertiary studies has a negative effect on the variables under consideration.
    Keywords: regional convergence, productivity, human capital composition, geographical spillovers
    JEL: O18 O47 R23
    Date: 2009–11
  17. By: Martin Binder (Max Planck Institute of Economics, Jena, Germany); Tom Broekel (Department of Economic Geography, Faculty of Geosciences, Utrecht University, The Netherlands)
    Abstract: In the literature on Sen’s capability approach, studies focussing on the empirical measurement of conversion factors are comparatively rare. We add to this field by adopting a measure of "conversion efficiency" that captures the efficiency with which individuals convert their resources into achieved functioning. We use a nonparametric efficiency procedure borrowed from production theory and construct such a measure for a set of basic functionings, using data from the wave 2006 of the British Household Panel Survey (BHPS). In Great Britain, 49.88% of the individuals can be considered efficient while the mean of the inefficient individuals reaches one fifth less functioning achievement. An individual's conversion efficiency is positively affected by getting older, being self-employed, married, having no health problems and living in the London area. On the other hand, being unemployed, separated/divorced/widowed and (self-assessed) disabled decrease an individual's conversion efficiency.
    Keywords: conversion efficiency, welfare measurement, robust nonparametric efficiency analysis, functioning production
    JEL: I12 I31 R15
    Date: 2009–12–08
  18. By: Nyangena, Wilfred (School of Economics, University of Nairobi); Köhlin, Gunnar (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Productivity gains from soil and water conservation (SWC) have empirical support in research stations. Previous empirical results from on-farm adoption of SWC are, however, varied. This study investigated the impact of soil conservation investment on farm productivity in three regions in Kenya. Using plot-level survey data, we focused on land productivity on plots with and without SWC. We tested the overall soil conservation hypothesis that increased SWC is beneficial for yield, as well as more specific hypotheses that SWC affects levels of inputs, returns from these inputs, and crop characteristics. The results showed a mixed picture where plots without SWC generally have higher yield values per hectare. However, plots with SWC are significantly steeper and more eroded than plots without SWC. A more careful analysis of a two-stage random effects–switching regression estimation comparing three SWC technologies to plots without SWC indicated that SWC increased the returns from degraded plots and sometimes from other inputs. A simulation exercise based on these estimations also showed that, in most cases, adoption has been beneficial for those who have done it and would be beneficial for those who have not.<p>
    Keywords: Kenya; soil conservation; switching regression; rural households; yields
    JEL: D61 Q12 Q16
    Date: 2009–11–30
  19. By: Bridgewater, Sue (University of Warwick); Kahn, Lawrence M. (Cornell University); Goodall, Amanda H. (University of Warwick)
    Abstract: We use data on British football managers and teams over the 1994-2007 period to study substitution and complementarity between leaders and subordinates. We find for the Premier League (the highest level of competition) that, other things being equal, managers who themselves played at a higher level raise the productivity of less-skilled teams by more than that of highly skilled teams. This is consistent with the hypothesis that one function of a top manager is to communicate to subordinates the skills needed to succeed, since less skilled players have more to learn. We also find that managers with more accumulated professional managing experience raise the productivity of talented players by more than that of less-talented players. This is consistent with the hypothesis that a further function of successful managers in high-performance workplaces is to manage the egos of elite workers. Such a function is likely more important the more accomplished the workers are – as indicated, in our data, by teams with greater payrolls.
    Keywords: productivity, leadership
    JEL: J24 M51
    Date: 2009–11
  20. By: Åström, Johanna (Department of Economics, Umeå University)
    Abstract: This paper studies how the spouse’s productivity in the labor market affects one’s individual earnings when married. Theoretically, the high productivity of a spouse in a marriage could affect the other spouse’s earnings in two ways: negatively through specialization and division of labor, or positively from human capital spillover. Using longitudinal microdata on individuals as both single and married people allows us to estimate the spouses’ productivity as a single persons and thereby avoid problems of endogeneity between the two spouses’ labor market performances. Productivity is approximated with residuals from estimates of pre-marriage earnings equations. Results indicate that there are negative effects of the spouse’s productivity on individual earnings for both males and females, and that this effect appears to be enhanced by the duration of the marriage. However, closer examination shows that only the youngest groups of males and females experience this negative effect. In addition, there is some evidence for a positive effect of the husband’s productivity on earnings in the case of older groups of females.
    Keywords: Marriage; Assortative mating; Earnings; Specialization
    JEL: D10 J12
    Date: 2009–11–27
  21. By: Klaesson, Johan (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Larsson, Hanna (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: It is a well known fact that wages have a tendency to be higher in larger regions. The source of the regional difference in wages between larger and smaller areas can be broadly divided into two parts. The first part can be attributed to the fact that regions have different industrial compositions. The second part is due to the fact that average regional productivity differs between regions. Using a decomposition method, akin to shift-share, we are able to separate regional wage disparities into an industrial composition component and productivity component. According to theory it is expected that productivity is higher in larger regions due to different kinds of economies of agglomeration. Also, larger regions are able to host a wider array of sectors compared to smaller regions. Output from sectors demanding a large local or regional market can only locate in larger regions. Examples of such sectors are e.g. various types of advanced services with high average wages. The purpose of the paper is to explain regional differences in wages and the productivity and composition components, respectively. The paper tests the dependence of wages, productivity and industrial composition effects on regional size (using a market potential measure). In the estimation we control for regional differences in education, employment shares, average firm size and self-employment. Swedish regional data from 2004 are used. The results verify that larger regions on average have higher wages, originating from higher productivity and more favorable industry composition.
    Keywords: Agglomeration Economies; Regions; Wages; Productivity; Industrial Composition; Sweden
    JEL: C21 J31 O18 R10 R12
    Date: 2009–11–23

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